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Europe’s prospects depend on more than beating the pandemic

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A resurgence of the pandemic is threatening to tip the eurozone into a double-dip recession, cutting short the recovery that took shape from the middle of this year. Few if any economists expect a slump as severe as the 11.8 per cent quarter-on-quarter contraction recorded between April and June. But services, which account for about three-quarters of economic activity in the 19-nation eurozone, are bearing the brunt of the tight restrictions on people’s movement that governments are reimposing in an effort to control Covid-19.

A larger, long-term question for the eurozone is whether the pandemic will turn out to be the moment when political leaders finally take decisive steps to address the vulnerabilities of the monetary union created in 1999. From the start the eurozone lacked several core features of other currency areas, such as a central treasury, a finance minister, a countercyclical fiscal capacity, common bond issuance and a comprehensive banking union.

The euro area has also fallen behind the US and China in the development of artificial intelligence and other digital technologies. In certain ways, the pandemic is stimulating efforts at closer eurozone integration. But it is less obvious that European governments and businesses will emerge from the crisis better placed to compete with their US and Chinese rivals in the most advanced industries.

A passenger uses an information robot at Tianhe Airport in Wuhan. The eurozone has fallen behind the US and China in developing artificial intelligence © Hector Retamal/AFP via Getty Images

According to the OECD’s latest forecasts, the eurozone economy will contract by 7.9 per cent this year, almost twice as much as during the financial crisis of 2009. The OECD predicts a return to growth of 5.1 per cent in 2021, but even a rebound of that size would not heal all wounds incurred this year. Economists at the Centre for Economic Policy Research, a think-tank, say small and medium-sized businesses are particularly at risk, with many bankruptcies likely in sectors such as accommodation, the arts, education and recreation.

However, if the magnitude of the economic crisis has no precedent in post-1945 Europe, neither do the countermeasures of eurozone governments. In size and design, these go further than the emergency steps taken during the sovereign debt and banking crises a decade ago. National governments are leading the way with extensive deficit spending measures, but the most eye-catching step is a €750bn recovery fund approved by EU leaders in July.

The fund breaks new ground in that the EU will for the first time borrow money on financial markets to finance transfers to its member states and other expenditures. Some €390bn are intended to be allocated as grants, and €360bn in loans.

Jean Pisani-Ferry, an economics scholar at the Florence-based European University Institute, calls the recovery fund “a high-risk gamble”.

The Brandenburg Gate in Berlin at the start of the pandemic in March © Odd Andersen/AFP via Getty Images

“If the plan succeeds, it will surely pave the way to further initiatives, and perhaps ultimately to a fiscal union alongside the monetary union established two decades ago,” he says. “But if the programme fails to deliver on stated goals, if political interests prevail over economic necessity, federal aspirations will be dashed for a generation.”

Three big questions about the fund are first, how quickly will it swing into operation, secondly, will governments make use of the entire €750bn package, and finally, to what extent will the money be spent on genuinely useful investments. According to the European Central Bank, less than 10 per cent of the total sum is likely to be paid out next year. The rest is due to be disbursed mostly between 2022 and 2024. It will therefore be important for eurozone governments not to withdraw national fiscal stimulus programmes next year, Mr Pisani-Ferry cautions.

Individual countries will be allocated funds on the basis of income per capita, unemployment trends and, in 2023, the falls in real gross domestic product they suffered in 2020-21. By these measures, Greece — which received three emergency financial rescues from 2010 to 2015 — is expected to be the largest net recipient of EU recovery funds. Cyprus, Italy, Portugal and Spain will also be net beneficiaries, as will the three Baltic states, Slovakia and Slovenia.

However, it remains to be seen if the programme — undoubtedly, one of the boldest economic initiatives since the EU’s founding Treaty of Rome in 1957 — will narrow the longstanding gap between the eurozone’s wealthiest and less well-off states. According to a study by the Brussels-based Bruegel think-tank, the pandemic has struck hardest at those countries where tourism accounts for a large share of the economy and where the quality of governance, in areas such as the rule of law and business regulation, is below the EU average.

The eurozone’s resilience will be enhanced if its leaders tackle long-overdue reforms such as completing the single European market for services, setting up a capital markets union and promoting the digitalisation of business. These serve as a reminder that Europe’s long-term economic prospects will depend on more than conquering Covid-19.



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Europe

End of an era as Lionel Messi and FC Barcelona part company

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Lionel Messi updates

Barcelona football club said on Thursday that Lionel Messi, widely regarded as one of the greatest of all players, is leaving because of “financial and structural obstacles” that it blamed on financial regulations imposed by La Liga, which runs the top two divisions in Spain, requiring the team to rein in its spending.

Messi, the frontman of FC Barcelona’s success for more than a decade, will be leaving a club where he has spent the entirety of his career, winning every leading trophy and personal accolade.

Messi and Barcelona had intended to sign a new contract on Thursday but ultimately the player and club were forced to separate, said Barcelona in a statement, adding that both sides “deeply regret” their split. La Liga declined to comment.

“Despite FC Barcelona and Lionel Messi having reached an agreement and the clear intention of both parties to sign a new contract today, this cannot happen because of financial and structural obstacles (Spanish Liga regulations),” Barcelona said. “As a result of this situation, Messi shall not be staying on at FC Barcelona. Both parties deeply regret that the wishes of the player and the club will ultimately not be fulfilled.”

Messi’s exit comes as Barcelona and rivals Real Madrid are at loggerheads with La Liga over the Spanish league’s plan to partner with private equity firm CVC Capital Partners, which plans to invest €2.7bn in the league, subject to clubs’ approval.

The exit of the superstar Argentina international, who earned a total of more than €555m between 2017 and 2021, according to Spanish newspaper El Mundo, underlines the financial pressures at Barcelona.

The Catalan club sunk to a net loss of almost €100m in the 2019-20 season, the first to be disrupted by the pandemic, as revenues of €855m fell short of the €1bn set in its budget. Its debt has soared north of €1bn. In June, the club approved a €525m debt refinancing.

On the pitch, Barca finished third in La Liga, its worst showing since 2008. It has not won the Uefa Champions League, Europe’s most prestigious club tournament, since 2015.

The decision comes just days after Barca president Joan Laporta said the club “have to make sure” Messi stays and that the process was “on the right track”. The president had also called for “greater flexibility” from La Liga.

Despite the long affiliation between Messi and Barcelona, the player last year told the club he wanted to leave but ultimately decided to stay on to avoid a legal dispute.

Messi’s departure comes a day after La Liga agreed a €2.7bn deal with US private equity group CVC Capital Partners to buy a minority stake in a new entity that would manage broadcast, sponsorship and digital rights for the league.

Barcelona and arch-rivals Real Madrid, which have been embroiled in a dispute with La Liga over plans for a breakaway European Super League, would stand to receive about €260m each from the deal with CVC.

The transaction was partly seen as a way to win over the support of Barcelona, which has been financially constrained by La Liga’s rules from making any high-profile acquisitions or renewal of contracts.

Real Madrid also lashed out at the CVC deal with CVC on Thursday, questioning its legality and accusing the Spanish league of negotiating the agreement without the club’s knowledge.

Barcelona followed up later on Thursday by joining Real in condemning La Liga’s planned partnership with the buyout firm. The club said: “FC Barcelona feels it is inappropriate to sign a half-century agreement given the uncertainties that always surround the football world. The terms of the contract that La Liga is describing condemn FC Barcelona’s future with regard to broadcasting rights.

“FC Barcelona wishes to express its surprise at an agreement driven by La Liga in which the teams’ opinions, including those of FC Barcelona, have not been taken into account.”

Spanish football clubs have yet to vote on the CVC agreement. Italy’s top football league, Serie A, turned down a similar agreement a few months ago.



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Europe targets adolescents for Covid jabs to curb Delta spread

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Covid-19 vaccines updates

French President Emmanuel Macron, whose habitual garb in public is a dark suit and tie, switched this week to a black T-shirt to encourage the young to get vaccinated over the holidays. 

“Many of you have questions or are scared,” Macron said in one of several videos he posted on TikTok and Instagram from what seemed to be the presidential holiday residence in southern France. “So I’ve decided to answer your questions directly. Go ahead.”

He has also posted short videos to correct misconceptions about the vaccines and France’s supposedly “freedom-killing” insistence on health passports to access bars and other public places. “Vaccination saves lives, the virus kills — it’s as simple as that,” he said in one. 

Macron may be one of the EU’s more visible leaders to urge the young to be jabbed, but he is not alone. 

On Wednesday, the UK belatedly extended its Covid-19 vaccination programme to 16- and 17-year-olds. But across continental Europe, governments from Scandinavia to the Mediterranean have already been targeting as yet unvaccinated teenagers to fight rising infections and hospitalisations driven by the highly infectious Delta variant of the virus.

This vaccination drive, which anticipates the new school term starting in September, is partly why Europe has already overtaken the US in terms of vaccination rates per 100 people and, on current projections, will soon overtake the UK too.

In France, health ministry data show that more than 40 per cent of those aged between 12 and 17 have already received one jab, and nearly 20 per cent are fully vaccinated. (In the vulnerable age group between 70 and 80, full vaccination coverage is close to 90 per cent.) 

Chart showing that Europe and the US have already vaccinated millions of teens, leaving the UK far behind

Most Nordic countries have also started to vaccinate teenagers and, by the end of July, almost one-third of 12-15 year-olds in Denmark had received at least one jab. “We need the immunity of the population, especially before a winter season,” Soren Brostrom, head of the Danish health authority, said in June when announcing the decision.

Much the same is true in Germany, where more than 900,000 adolescents or 21 per cent of those aged between 12 and 17, have received at least one jab, and more than 10 per cent are fully vaccinated. 

Individual German parents and children already have had the legal right to get vaccinated since June, and several states had begun limited offerings of the jabs to 12-17-year-olds.

But health minister Jens Spahn announced on Monday plans to offer more jabs to youngsters before school begins. “This is absolutely not about applying pressure,” he said on RBB radio. “It is about giving those who want to be vaccinated, including children and adolescents, the opportunity.”

The next step in Europe will be to vaccinate young children, especially as Delta strain infections seem to be rising fastest among the unvaccinated young. In a recent UK study, almost a third of the positive Delta variant tests came from people aged 5 to 17.

“It’s clear that children under 12 will become the main reservoir of infections once a large share of the over-12 population is vaccinated,” said Antoine Flahault, director of the Institute of Global Health at the University of Geneva. 

“It seems reasonable today to suppose that we’ll only be able to finish with this pandemic by vaccinating a very large share of the population, perhaps 90-95 per cent, by including children,” he said, noting that the jabs would have to be supplemented by other measures such as continued border controls as well.

In Spain, which has already overtaken the UK and the US in vaccinating its population, the government says its inoculation drive must now focus on younger people. 

Prime Minister Pedro Sánchez has declared that the country, where 59 per cent are fully vaccinated, deserves “the gold medal for vaccinations”. This week he said the country was on course to fully vaccinate 70 per cent of its population before the end of August.

But officials increasingly recognise that will not be enough to provide “herd immunity”. Infection rates in Spain — now in its fifth coronavirus wave — remain extremely high, with cases particularly prevalent among people in the 12-19 and 20-29 age groups; in the former, the full vaccination rate is less than 4 per cent.

High infection rates among these groups — with a 14-day rate of above 1,300 per 100,000 people — have spilled over to older groups. The 14-day rate among the over-eighties has been close to 300, even though according to official figures that age group is 100 per cent vaccinated.

“What is happening in Spain shows quite simply that the vaccinations do not have the same efficiency that was indicated in the trials . . . It is going to be more difficult to reach herd immunity,” said Rafael Bengoa, a former Basque region minister for health and director at the World Health Organization. 

He said the Delta variant — now accounting for more than 75 per cent of Spanish cases — was a key factor blunting vaccines’ impact and argued that the necessary level of protection would now probably require full vaccination for closer to 90 per cent of the overall population.

“We are only going to achieve this when we have revaccinated older people who are losing protection relatively quickly and when we have vaccinated young people and children,” he said. “The end is further away than we predicted.”

Additional reporting by Richard Milne in Oslo





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Global house prices: Raising the roof

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Global house prices: Raising the roof



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